norman, bus 4385 key points: chapter 6: corporate-level strategy understand the difference between...
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Norman, BUS 4385
Key Points:Chapter 6: Corporate-Level Strategy
• Understand the difference between business-level strategy and corporate level strategy
• Levels and Types of Diversification• Definitions• Identify the type of diversification used by a firm
• Understand the various reasons for diversification• How can diversification create value?• What reasons usually fail to create value?
• Understand the issues firms should evaluate when considering diversification
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Norman, BUS 4385
Business-Level versus Corporate-LevelStrategy
• Business-Level (Competitive) Strategy• How to create value by competing in each individual
business
• Corporate-Level (Companywide) Strategy• How to create value for the corporation as a whole• Key questions
• What business(es) should a firm be in?• How should the corporate office manage this group
of businesses?
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Norman, BUS 4385
Core Competencies and Corporate Strategy
• What core competencies should the corporation develop and exploit?
• How should these be shared across businesses?
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Norman, BUS 4385
Figure 6.1: Levels and Types of Diversification
Low Levels of Diversification Single business: More than 95% of revenue from a
single business
Dominant business: Between 70% and 95% of revenue from a single business
Moderate to High Levels of Diversification Related constrained: Less than 70% of revenue from the
dominant business and all businessesshare product, technological, and distribution links
Related linked: Less than 70% of revenue from the dominant business, and only limited links between businesses
Very High Levels of Diversification Unrelated: Less than 70% of revenue from the
dominant business, and no commonlinks between businesses
A
A
B
B
A
C
B
A
C
B
A
C
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Norman, BUS 4385
Table 6.1
Motives to Enhance Strategic Competitiveness• Economies of scope (related diversification)
• Sharing activities• Transferring core competencies
• Market power (related diversification)• Blocking competitors through multipoint competition• Vertical integration
• Financial economies (unrelated diversification)• Efficient internal capital allocation• Business restructuring
Motives with Neutral Effects on Strategic Competitiveness• Antitrust regulation, tax laws, low performance, uncertain future cash flows,
firm risk reduction, tangible resources, intangible resources
Managerial Motives that Reduce Strategic Competitiveness• Diversifying managerial employment risk• Increasing managerial compensation
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Norman, BUS 4385
Vertical Integration
• Definition: a firm produces its own inputs or disposes of its own outputs
• Reasons companies vertically integrate• Market power• Savings on operational costs• Avoidance of market costs• Controls product quality (McDonald’s)• Protects technology• Builds entry barriers (e.g., Alcoa in aluminum,
bauxite mine)
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Norman, BUS 4385
Vertical Integration
• Limits of vertical integration• Bureaucratic costs• Cost disadvantages• Rapid changes in technology• Risky when demand is unstable or unpredictable
• Firms must weigh:• Costs• Value derived from vertical integration
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Norman, BUS 4385
Issues to Evaluate When Considering Diversification
• What resources, capabilities, and core competencies do we possess that would allow us to outperform competitors?
• What core competencies must we possess to succeed in a new product or geographic market?
• Will we only be a player in the new product or geographic market or will we emerge as a winner?
• Is it possible for us to leapfrog competitors (e.g., change the rules of competition)?
• Will diversification break up capabilities and competencies that should be kept together?
• What can the firm learn through its diversification and is it organized properly to acquire such knowledge?